10.4 HSC Topic Four — Economic Policies and Management
25% of indicative time
This topic focuses on the aims and operation of economic policies in the Australian economy and hypothetical situations. The management of an economy is of central concern, including contemporary Australian policies and alternative approaches.
Outcomes
A student:
H1 demonstrates understanding of economic terms, concepts and relationships
H2 analyses the economic role of individuals, firms, institutions and governments
H5 discusses alternative policy options for dealing with problems and issues in contemporary and hypothetical contexts
H6 analyses the impact of economic policies in theoretical and contemporary Australian contexts
H7 evaluates the consequences of contemporary economic problems and issues on individuals, firms and governments
H9 selects and organises information from a variety of sources for relevance and reliability
H10 communicates economic information, ideas and issues in appropriate forms
H11 applies mathematical concepts in economic contexts
H12 works independently and in groups to achieve appropriate goals in set timelines.
Content
Students learn to:
Examine economic issues
• analyse the opportunity cost of government decisions to concentrate on solving specific economic problems or issues
• investigate structural changes in the Australian economy resulting from microeconomic reforms
• apply economic theory to explain how a government could address an economic problem or issue
Apply economic skills
• explain how governments are restricted in the simultaneous achievement of economic objectives
• use (simple) multiplier analysis to explain how governments can solve economic problems
• analyse alternative ways to finance a budget deficit and their impact on the economy
• identify limitations on the effectiveness of economic policies
• explain the impact of key economic policies on an economy
• propose and evaluate alternative policies to address an economic problem in hypothetical and the contemporary Australian contexts
• explain, using economic theory, the general effects of macroeconomic and microeconomic policies on an economy
• select an appropriate policy mix to address a specific economic problem.
Students learn about:
Economic objectives in relation to:
• economic growth
• full employment
• price stability
• external stability
• environment
• distribution of income
A major rationale for government macroeconomic intervention is to stabilise fluctuations in the business cycle, known as counter-cyclical or stabilisation policy.
The three major objectives of government economic policy are:
Sustaining economic growth is important as it leads to: · Rising real per capita incomes · Employment creation · Higher standards of living · Expansion in productive capacity · Greater investment in private and public infrastructure · More opportunities to realise gains from international trade and investment
Full employment is the achievement of the objective of full employment of the economy’s resources of land, labour, capital and enterprise. The NAIRU is estimated at 4.75% of the workforce in Australia.
Okun’s Law states that the rate of economic growth must exceed the sum of productivity growth and the growth in the workforce for unemployment to fall.
Price stability or low inflation is a major objective of government economic policy because rising inflation reduces real incomes and living standards.
Impacts of rising inflation include: · Misallocation of resources · Loss in international competitiveness · Higher inflationary expectations
External balance refers to the goal of Australia meeting its short term and long term financial obligations, and has three main dimensions: 1. Ensuring that the current account in the balance of payments is in equilibrium. 2. Maintaining stability of the exchange rate in currency markets. 3. Ensuring that the levels of net foreign liabilities and net external debt are sustainable as a percentage of GDP.
Ecologically sustainable development as an objective of government policy means that current levels of economic growth and development should meet the needs of the present generation without compromising the ability of future generations to meet their own needs.
The government has a social responsibility to redistribute income from the rich to the poor to make the distribution of income fairer, and to alleviate absolute and relative poverty in society.
The objective is to reduce the extent of inequality by: · Providing transfer payments to disadvantaged social groups unable to earn market income · Making the taxation system progressive to redistribute income from high to low income earners · Using a proportion of taxation revenue to finance spending on elements of the social wage · Reducing the incidence of poverty traps through the selective targeting of welfare assistance
Potential conflicts between objectives
Price stability and full employment may conflict with each other in the short run because if the government pursues policies to promote economic growth and full employment, growth may become unsustainable and lead to inflationary pressures and a lack of price stability.
Economic growth and full employment may conflict with external balance in the short run if unsustainable rates of economic growth lead to rising import spending and deterioration in the current account of the balance of payments.
The pursuit of microeconomic efficiency to raise domestic economic growth may conflict in the long term with full employment as some structural unemployment will result from the structural changes induced by microeconomic reform measures.
Economic growth may conflict with environmental quality in the long run if economic growth is ecologically unsustainable.
The main policies available for economic management
Macroeconomic policies
• rationale for macroeconomic policies — stabilisation and shifts in aggregate demand
è Macroeconomic management is designed to minimise these fluctuations so that economies can experience low rates of inflation and unemployment and relatively stable economic growth è Also attempts to stabilise economic growth by smoothing peaks and troughs of business cycle è In periods of fast economic growth governments will: o Increase tax: reduce disposable income and reduce spending and pressures on inflation and CAD o Reduce government spending: lower aggD by lowering aggregate expenditure o Increase interest rates: lower return, less borrowing and spending è In periods of slow economic growth governments will o Decrease tax: increase disposable income, more spending o Increase government spending: higher aggD by increasing aggregate expenditure o Decrease interest rates: higher return, more borrowing and spending è Macroeconomics not effective for long term. è Works on demand side policies
Microeconomic policies
• rationale for microeconomic policies including shifts in aggregate supply, efficiency
è Microeconomic policy improves resource allocation between firms and industries in order to maximise output from scarce resources è Microeconomic reform is central to the government’s long term aim of addressing CAD and inflation è Shifted from influencing demand to influencing supply by improving competitiveness, productivity, efficiency of industries and workforce participation è Overall aim is to encourage the efficient operation of markets è Increase in aggregate supply leads to increased economic growth and decreased price level. è Increase in supply sourced from higher productivity, more resources · 3 types of possible efficiency gains from micro policy include: è Technical/productive efficiency è Allocative efficiency è Dynamic efficiency leading to: o Increased national income o Increased living standards o Ability to absorb adverse shocks in the global economy eg. GFC
Fiscal policy
• Federal Government Budgets and budget outcomes
• effects of budgetary changes on resource use, income distribution and economic activity
• methods of financing deficits
• use of a surplus
Monetary policy
• purpose of monetary policy
• implementation of monetary policy — Reserve Bank of Australia
• impact of changes in interest rates on economic activity, exchange rate
Structural change
• effects of microeconomic policies on individual product and factor markets and the economy
• regulation and deregulation
Trade policy
• direct and indirect policies to promote or restrict trade
• trade and industry policies in Australia
Prices and incomes policy
• reasons for prices and incomes policies
• possible prices and incomes policies in Australia
• advantages and disadvantages of centralised and decentralised policies
Labour market policies
• current industrial relations framework
– safety net, wage cases, enterprise bargaining, workplace agreements, individual contracts
– role of the courts, tribunals and the employment advocate
– arguments for and against the current mix of market and non-market forces used to determine the returns to labour
• work practices
• dispute resolution
• education and training, employment programs
Limitations on policy implementation
• time lags
• global influences
• political constraints
Policy responses and their effects in dealing with the economic issues
• economic growth
• unemployment
• inflation
25% of indicative time
This topic focuses on the aims and operation of economic policies in the Australian economy and hypothetical situations. The management of an economy is of central concern, including contemporary Australian policies and alternative approaches.
Outcomes
A student:
H1 demonstrates understanding of economic terms, concepts and relationships
H2 analyses the economic role of individuals, firms, institutions and governments
H5 discusses alternative policy options for dealing with problems and issues in contemporary and hypothetical contexts
H6 analyses the impact of economic policies in theoretical and contemporary Australian contexts
H7 evaluates the consequences of contemporary economic problems and issues on individuals, firms and governments
H9 selects and organises information from a variety of sources for relevance and reliability
H10 communicates economic information, ideas and issues in appropriate forms
H11 applies mathematical concepts in economic contexts
H12 works independently and in groups to achieve appropriate goals in set timelines.
Content
Students learn to:
Examine economic issues
• analyse the opportunity cost of government decisions to concentrate on solving specific economic problems or issues
• investigate structural changes in the Australian economy resulting from microeconomic reforms
• apply economic theory to explain how a government could address an economic problem or issue
Apply economic skills
• explain how governments are restricted in the simultaneous achievement of economic objectives
• use (simple) multiplier analysis to explain how governments can solve economic problems
• analyse alternative ways to finance a budget deficit and their impact on the economy
• identify limitations on the effectiveness of economic policies
• explain the impact of key economic policies on an economy
• propose and evaluate alternative policies to address an economic problem in hypothetical and the contemporary Australian contexts
• explain, using economic theory, the general effects of macroeconomic and microeconomic policies on an economy
• select an appropriate policy mix to address a specific economic problem.
Students learn about:
Economic objectives in relation to:
• economic growth
• full employment
• price stability
• external stability
• environment
• distribution of income
A major rationale for government macroeconomic intervention is to stabilise fluctuations in the business cycle, known as counter-cyclical or stabilisation policy.
The three major objectives of government economic policy are:
1. Sustainable economic growth
2. Internal balance
3. External balance
Sustaining economic growth is important as it leads to:
· Rising real per capita incomes
· Employment creation
· Higher standards of living
· Expansion in productive capacity
· Greater investment in private and public infrastructure
· More opportunities to realise gains from international trade and investment
Full employment is the achievement of the objective of full employment of the economy’s resources of land, labour, capital and enterprise. The NAIRU is estimated at 4.75% of the workforce in Australia.
Okun’s Law states that the rate of economic growth must exceed the sum of productivity growth and the growth in the workforce for unemployment to fall.
Price stability or low inflation is a major objective of government economic policy because rising inflation reduces real incomes and living standards.
Impacts of rising inflation include:
· Misallocation of resources
· Loss in international competitiveness
· Higher inflationary expectations
External balance refers to the goal of Australia meeting its short term and long term financial obligations, and has three main dimensions:
1. Ensuring that the current account in the balance of payments is in equilibrium.
2. Maintaining stability of the exchange rate in currency markets.
3. Ensuring that the levels of net foreign liabilities and net external debt are sustainable as a percentage of GDP.
Ecologically sustainable development as an objective of government policy means that current levels of economic growth and development should meet the needs of the present generation without compromising the ability of future generations to meet their own needs.
The government has a social responsibility to redistribute income from the rich to the poor to make the distribution of income fairer, and to alleviate absolute and relative poverty in society.
The objective is to reduce the extent of inequality by:
· Providing transfer payments to disadvantaged social groups unable to earn market income
· Making the taxation system progressive to redistribute income from high to low income earners
· Using a proportion of taxation revenue to finance spending on elements of the social wage
· Reducing the incidence of poverty traps through the selective targeting of welfare assistance
Potential conflicts between objectives
Price stability and full employment may conflict with each other in the short run because if the government pursues policies to promote economic growth and full employment, growth may become unsustainable and lead to inflationary pressures and a lack of price stability.
Economic growth and full employment may conflict with external balance in the short run if unsustainable rates of economic growth lead to rising import spending and deterioration in the current account of the balance of payments.
The pursuit of microeconomic efficiency to raise domestic economic growth may conflict in the long term with full employment as some structural unemployment will result from the structural changes induced by microeconomic reform measures.
Economic growth may conflict with environmental quality in the long run if economic growth is ecologically unsustainable.
The main policies available for economic management
Macroeconomic policies
• rationale for macroeconomic policies — stabilisation and shifts in aggregate demand
è Macroeconomic management is designed to minimise these fluctuations so that economies can experience low rates of inflation and unemployment and relatively stable economic growth
è Also attempts to stabilise economic growth by smoothing peaks and troughs of business cycle
è In periods of fast economic growth governments will:
o Increase tax: reduce disposable income and reduce spending and pressures on inflation and CAD
o Reduce government spending: lower aggD by lowering aggregate expenditure
o Increase interest rates: lower return, less borrowing and spending
è In periods of slow economic growth governments will
o Decrease tax: increase disposable income, more spending
o Increase government spending: higher aggD by increasing aggregate expenditure
o Decrease interest rates: higher return, more borrowing and spending
è Macroeconomics not effective for long term.
è Works on demand side policies
Microeconomic policies
• rationale for microeconomic policies including shifts in aggregate supply, efficiency
è Microeconomic policy improves resource allocation between firms and industries in order to maximise output from scarce resources
è Microeconomic reform is central to the government’s long term aim of addressing CAD and inflation
è Shifted from influencing demand to influencing supply by improving competitiveness, productivity, efficiency of industries and workforce participation
è Overall aim is to encourage the efficient operation of markets
è Increase in aggregate supply leads to increased economic growth and decreased price level.
è Increase in supply sourced from higher productivity, more resources
· 3 types of possible efficiency gains from micro policy include:
è Technical/productive efficiency
è Allocative efficiency
è Dynamic efficiency leading to:
o Increased national income
o Increased living standards
o Ability to absorb adverse shocks in the global economy eg. GFC
Fiscal policy
• Federal Government Budgets and budget outcomes
• effects of budgetary changes on resource use, income distribution and economic activity
• methods of financing deficits
• use of a surplus
Monetary policy
• purpose of monetary policy
• implementation of monetary policy — Reserve Bank of Australia
• impact of changes in interest rates on economic activity, exchange rate
Structural change
• effects of microeconomic policies on individual product and factor markets and the economy
• regulation and deregulation
Trade policy
• direct and indirect policies to promote or restrict trade
• trade and industry policies in Australia
Prices and incomes policy
• reasons for prices and incomes policies
• possible prices and incomes policies in Australia
• advantages and disadvantages of centralised and decentralised policies
Labour market policies
• current industrial relations framework
– safety net, wage cases, enterprise bargaining, workplace agreements, individual contracts
– role of the courts, tribunals and the employment advocate
– arguments for and against the current mix of market and non-market forces used to determine the returns to labour
• work practices
• dispute resolution
• education and training, employment programs
Limitations on policy implementation
• time lags
• global influences
• political constraints
Policy responses and their effects in dealing with the economic issues
• economic growth
• unemployment
• inflation
• external stability
• distribution of income and wealth
• management of the environment.